Under Maximum Reserve System, the government fixes the maximum limit up to which the monetary authority can issue notes without the backing of metallic reserves. The monetary authority cannot issue notes beyond this limit.

The maximum limit is not rigid and may be revised from time to time according to the changing needs of the economy. This system was followed by France and England up to 1928 and 1939 respectively.

Under this system, the Central bank is given the power to determine the maximum limit and thus an element of elasticity is introduced in the system of note issue.

The system, however involves the dangers of over-issue and loss of public confidence when the maximum limit is raised and additional currency is circulated without the backing of metallic reserves.